Chapter 7 vs Chapter 13 Bankruptcy: Which Is Best for You

Jill Bridges
Expert Contributor
Last Updated:
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  • Chapter 7 and Chapter 13 are the two most popular types of bankruptcy for individuals.
  • Chapter 7 is only available to those who don’t have the means or assets to pay their debts.
  • Chapter 13 allows you to pay off your debts with a payment plan that takes up to five years.

If you’re living under a mountain of debt, it may seem like you’ll never be able to pay off everything you owe. Some people’s debt can be so severe that declaring bankruptcy is the only way to clear their debt and put themselves back on stable financial footing.

For individuals, there are two primary forms of bankruptcy: Chapter 7 and Chapter 13. Most people have at least heard of these two different forms of bankruptcy, but few realize how different they actually are. Here are a few things that you need to know about Chapter 7 and Chapter 13 bankruptcy if you’re searching for a way to get out of debt.

Not All Debts Are Cleared

Before diving into the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy, it’s important to understand that bankruptcy isn’t a get-out-of-debt-free card. A common misconception about bankruptcy is that it provides you with a clean slate, but this isn’t the case, unfortunately. For example, Chapter 7 bankruptcy can liquidate many of your debts, but you’ll have to give up something in return, such as personal property.

Whichever form of bankruptcy you decide is right for you, remember that not all of your debts will be discharged, which means you can make it through the bankruptcy process and still find yourself owing money. Debts that cannot be discharged through bankruptcy include:

Chapter 7 vs Chapter 13 Bankruptcy: Which Is Best for You
  • Alimony
  • Child Support
  • Taxes in certain categories

If your debt is related to any of these issues, bankruptcy won’t solve your problems.

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Benefits of Chapter 7 Bankruptcy

If you’re thinking about declaring bankruptcy to deal with your debts, it’s a good idea to compare the strengths and weaknesses of each bankruptcy option, starting with Chapter 7. One of the biggest benefits of declaring Chapter 7 bankruptcy is that it can give you a temporary reprieve from having to deal with debt collectors. Once you’ve declared bankruptcy, debt collectors may be prevented from:

  • Contacting you about your debt
  • Garnishing your wages
  • Filing a lawsuit or continuing a lawsuit
  • Attempting to collect money from you

Chapter 7 bankruptcy is also beneficial because it can reduce your debt load. Once a debt is discharged, you will no longer need to make payments toward that debt. With this extra money, you can either work to pay off debts not discharged by bankruptcy or use it for necessary household expenses. Some debts that can be discharged in Chapter 7 bankruptcy include:

  • Credit card debt
  • Medical bills
  • Utility bills

Chapter 7 bankruptcy is also a lot quicker than other forms of bankruptcy. In general, Chapter 7 bankruptcy takes about 100 days to complete, plus the amount of time it takes you to get through required credit counseling.

Disadvantages of Chapter 7 Bankruptcy

Chapter 7 does have some disadvantages that you should consider before beginning the process. First, you will usually need to give up some assets when declaring Chapter 7. If you have any equity in assets such as cars or homes, your state may require that you give up those assets before any of your debts will be discharged.

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Another drawback of declaring Chapter 7 bankruptcy is that it can negatively affect your credit score. Chapter 7 bankruptcies can stay on your credit report for up to 10 years, and while this may not prevent you from securing a loan, it will raise your interest rates much higher than they might be otherwise.

Advantages of Chapter 13 Bankruptcy

Depending on your level of debt and financial situation, Chapter 13 bankruptcy may be the better option. With Chapter 7, you must prove that your finances — including income and assets owned — prevent you from repaying your debt. If you earn above a certain income threshold and own assets that could be sold to pay your debt, you should think about filing Chapter 13 bankruptcy instead.

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The good thing about Chapter 13 bankruptcy is that it doesn’t require you to give up your assets. In fact, this form of bankruptcy can help to protect your assets since foreclosures and other forms of debt collection will be halted once bankruptcy has been declared. So, if you want to pay off your debt but don’t want to lose your assets, Chapter 13 bankruptcy can be a good choice.

Chapter 13 bankruptcy can also make it easier to pay off your debts. With this form of bankruptcy, you’ll agree to a consolidated debt plan that will help you pay all of your creditors. Every month, you’ll pay a lump sum based on the terms of your plan that will then be distributed among your creditors.

Chapter 13 Bankruptcy Drawbacks

Like Chapter 7 bankruptcy, there are certain disadvantages to Chapter 13 bankruptcy that must be considered before you decide if this debt relief solution is right for you. With Chapter 13, the biggest problem is how long it can take you to clear your debt. The Chapter 13 process will continue until your repayment plan is complete. In general, this can take three to five years, which means you’ll be dealing with your bankruptcy for the foreseeable future.

Chapter 13 can also make it difficult to live your life as you are accustomed. As part of your repayment plan, you’ll need to promise all of your disposable income to your debt. This means that any extra money you’ll have will go to your debt.

Finally, if you’re unable to abide by the terms of your payment plan, the court may convert your Chapter 13 bankruptcy to a Chapter 7 bankruptcy. If this occurs, your assets that were once protected can be liquidated to pay off your debt.

As you see, both Chapter 7 and Chapter 13 bankruptcy have certain strengths and weaknesses, so you’ll need to be careful about choosing the option that fits your debt. If you’re ready to get rid of your debt for good, Solvable is here to help. Our research articles and debt relief company reviews make it easier to find the solution that fits your lifestyle. Contact us today to get started.

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Jill Bridges
Expert Contributor
Last Updated: